First, will be okay...eventually...

I know, it all sounds impossible. But more people are going to college than ever. And while many of them are accumulating debt faster than Congress, you can still get through this without an impossible financial burden. Just remember, that there will likely be no single source of money, you will have to be realistic on selecting the right school, and your major means everything. So, relax and start the journey, one step at a time...

Wednesday, September 7, 2011

Repaying Your Student Loans and other Facts of Life

So you needed to close the gap in funding your college education with an education loan. You are not alone - 65.6% of graduating college seniors have student loans, with an average outstanding balance of $24,145 as of 2008, the latest comprehensive data available. As discussed in a previous post, loans can be an excellent way to fund your college education, as long as you don't overextend yourself and you understand your obligations. A typical 10 year student loan at 6.8% interest (the current unsubsidized federal student loan rate) would reqiure a monthly payment of about $278. This represents  6.7% of the average college graduates starting salary of $50,034, a bearable burden if your degree enabled you to get started in your career.

For federal student loans, you will need to start repayment after either graduation, if you leave school, or if your attendance is less then half-time, but only after a grace period expires. For Stafford loans, the grace period is six months and for Perkins loans it is nine months.

For undergraduate federal parent (PLUS) loans, the repayment begins within 60 days of the date that the loan is fully disbursed (there is no "waiting" period until graduation or other event). A graduate student PLUS Loan borrower can defer repayment while the borrower is enrolled at least half-time, and for an additional six months after the borrower is no longer enrolled at least half-time. However, be aware that interest  during these periods will be added to the loan balance if it is not paid by the borrower during this period. Similar rules are also in place for Parent PLUS Loan borrowers. Your loan servicer will provide information about repayment and will notify you of the date loan repayment begins.

Private loans differ in that they are not guaranteed by the federal government, nor are there subsidized versions available. They also have fewer repayment options, and typically a higher interest rate. While some private lenders may offer deferment options, they are not required to. Be sure you completely understand  the repayment terms and conditions for your specific loan. There are many good sites that allow you to compare students loans, such as Overture Marketplace and Graduate Leverage.

It is very important that you make your full loan payment on time either monthly (which is usually when you'll pay) or according to your repayment schedule. If events in your life truly prevent you from being able to maintain your loan payments, be aware that under certain circumstances you can temporarily suspend your payments for federal student loans with deferment and forbearance. In deferment, you can suspend loan payments due to specific reasons, with differing rules based on the amount and age of the loan(s). Unemployment, extreme economic hardship, enrolling in school at least half time, or active military duty can qualify you for deferment, with different criteria to qualify for deferment and different allowances for each type of deferment. Forbearance is similar, but since it can increase the amount you owe it is a less desirable alternative than deferment. In forbearance, your loan(s) continue to accrue interest, and that added interest is added to the loan balance at the end of the forbearance period. Forbearance is typically granted only in cases of serious illness or financial hardship, and at the discretion of the lender.

If you are 270 days or more  past due, you will end up in default, which has serious consequences. In default, the lender is required to collect on the debt. Your entire loan balance will become due, collection fees can be added to your loan balance, up to 15% of your wages can be garnished (taken) to cover your debt, federal payments (such as Social Security or income tax refunds) can be taken, and you lose the option to defer the loan payments. Student loan default is one of the worst items to appear on your credit report, and you may be denied other loans (car, home, etc), your outstanding loan interest rates and insurance rates may rise, and you may be denied a job due to poor credit.

In general, student loan obligations (for federal or private loans) cannot be discharged through personal bankruptcy, expect in the rare case where extreme financial hardship can be proven for you and your dependants. This often requires demonstrating that:

  • The borrower cannot maintain a minimal standard of living for the borrower and the borrower’s dependents if forced to repay the loans, based on current income and expenses;
  • Circumstances indicate that this condition is likely to persist for a significant portion of the repayment period; and
  • The debtor has made good faith efforts to repay the loans.

For futher details on students loan repayment issues including repayment challenges and default, consult the non-profit American Student Assistance.

If you have more than one student loan, you may want to consolidate them into a single fixed-rate loan to simplify your payment. This also may lower your monthly payments and may qualify your for renewed deferment options, and will allow you to switch repayment plans during repayment. For federal loans, this is a free service of the Department of Education and most all federal unsubsidized and subsidized student loans can be consolidated. The federal government has a comprehensive site on federal student loan consolidation. Private student loan consolidation is also possible, though not in combination with federal student loans and not through the Department of Education program. You may want to avoid consolidating private loans if your loan has a pre-payment penalty clause (understand your terms and conditions!), but if your credit is good you may be able to get a better interest rate.

Remember, student loan interest is tax deductible, whether or not you itemize your income tax deductions. The Student Loan Deduction can reduce the amount of your income subject to tax by up to $2,500 (as of  the 2010 tax year) if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return). Generally, interest on personal loans you pay, other than possibly mortgage interest, is not deductible. However, this deduction allows for interest paid on a student loan used for higher education. The student may be you, your spouse, or your dependant, and must be enrolled at least half-time in a degree program, including graduate school. Interest on loans from a relative or a qualified employer plan does not qualify (the employer plan is considered a benefit of employment).

There are also opportunities for federal student loan forgiveness when certain conditions are met, such as volunteer work, military service, teaching or practicing medicine and law in certain communities, and working in a non-profit agency. Service in the Peace Corps, AmeriCorps, and VISTA can qualify you for at least partial forgiveness. Students who are in the Army National Guard may be eligible for the Student Loan Repayment Program, which pays up to $50,000 for certain jobs, with a six- or eight-year enlistment. The Public Service Loan Forgiveness Program allows for forgivenes of the outstanding loan balance for certain public service employees who have maintained their loan repayments for 10 years. Also, the American Federation of Teachers has a database of loan forgiveness programs for teachers, and the Department of Eucation's Stafford Teacher Loan Forgiveness Program is intended to encourage individuals to enter and continue in the teaching profession.


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